NPS vs PPF: Which Investment is Better for You?
Updated: Oct 22
As an effective strategy for increasing wealth and ensuring financial security, investing is vital in life. You may ensure your future and reach your financial objectives by investing your money, which has the potential to grow over time. However, not all investment options are the same. The government supports two retirement savings plans: the Public Provident Fund (PPF) and the National Pension Scheme (NPS). To safeguard your post-retirement existence, they both advise you to save money on a regular basis. But why are there two similar-seeking schemes? What distinguishes them from one another? Which one of them ought to you pick? To assist you in properly planning your investments, you can find information about both NPS and PPF in this comprehensive guide.
Table of content
NPS vs PPF: Picking the Best One
It is a difficult decision. The Public Provident Fund (PPF) is the first fund that springs to mind when considering post-retirement savings. PPF is an excellent investment option for long-term investments since it offers guaranteed returns for all age groups and over an extended period of time. But as a mechanism for saving for retirement, the National Pension Scheme, or NPS, has also been receiving a lot of attention lately. Since the government announced in the 2015–16 Budget that an additional tax deduction of Rs. 50,000 for NPS investments would be available, the use of NPS has expanded. But which one of these, if you could only pick one, would you pick? In this piece, we seek to provide an answer to that query.
Understanding NPS
With the exception of the armed forces, employees of the public, private, and unorganised sectors are eligible to participate in the government-sponsored National Pension Scheme. Through the course of their employment, account holders in this system can make regular contributions to a pension account. The account holders can use a portion of the corpus as a lump payment upon retirement and use the remaining portion as a pension. The Indian government chose to discontinue defined-benefit pensions, and on January 1, 2004, it launched the National Pension Scheme. All NPS operations are governed by the Pension Fund Regulatory and Development Authority (PFRDA). At first, the program was restricted to government workers; but, as of now, everyone between the ages of 18 and 70 is eligible to participate in this investment plan and get its advantages.
Who Can Invest in NPS
Any Indian citizen between the ages of 18 and 70 is eligible for the National Pension Scheme. By enrolling in the program and consistently contributing to it, one can receive the benefits. The requirements to participate in this program as an investor are as follows:
To apply for POP/POP-SP, you must be between the ages of 18 and 70.
To comply with Know Your Customer (KYC) regulations, the account holder must provide pertinent documentation.
Features of NPS
Income tax benefits: Under Section 80C, Section 80CCC, and Section 80CCD (1) of the Income Tax Act, 1961, subscribers are eligible to receive an income tax exemption of up to Rs. 1.5 lakh with NPS. In addition, they are eligible for an extra benefit under Section 80CCD of Rs. 50,000 (1b). The income tax benefits of NPS are significantly bigger than those of PPF, which is one of the key differences between the two.
Early withdrawal and exit option: The partial withdrawal cap for Tier I subscribers is 25% of the entire contribution. However, to be eligible for such withdrawals, the account needs to be at least ten years old. In the event of a partial exit, an annuity or pension plan will be purchased with the remaining 80% of the contribution, of which 20% may be withdrawn.
Downsides of NPS
NPS has a restricted window of time during which withdrawals made prior to retirement are not permitted. You may not be able to access your entire corpus at maturity if you must use a sizable amount of it to buy an annuity. Because the returns in NPS are dependent on the state of the market, they are volatile.
Understanding PPF
The Public Provident Fund, or PPF, is a government-funded program that was first introduced in 1965 and uses compound interest to guarantee returns on investments. This savings plan, which has a 15-year lock-in term, can assist you in building your retirement corpus over an extended period of time. At the moment, this plan is thought to be the best option for people searching for a risk-free investment because it pays 7.1% annual compound interest. Anyone can participate in the program and make investments into a PPF account to provide a safe financial safety net and to take advantage of tax advantages. Under section 80C of the Income Tax Act, 1961, contributions made into a PPF account up to Rs 1.5 lakh annually are exempt from taxation. A maximum of Rs 1.5 lakh and a minimum of Rs 500 must be invested into the account annually; up to 12 deposits are allowed. PPF permits withdrawals during five consecutive years of continuous operation, subject to the following conditions, with an account maturity of fifteen years:
To cover the costs of higher education
To handle medical emergencies (supported by medical records in the event of serious or terminal illnesses)
Who Can Invest in PPF?
Any Indian citizen who is at least eighteen years old may open and make investments in a PPF account. Hindu Undivided Families (HUFs) and Non-Resident Indians (NRIs) are not eligible for the program. Joint accounts are not permitted, and an individual may only have one PPF account in their name. On the other hand, an extra PPF account may be opened on behalf of a youngster or someone who is mentally incompetent.
Features of PPF
Income tax benefits: Under Section 80C of the ITA, the Public Provident Fund is permitted to provide income tax benefits of up to Rs. 1.5 lakh. It should be mentioned that while comparing NPS to PPF, the latter does not provide Section 80CCD (1b) tax benefits.
Loan against PPF: A PPF Account Holder is eligible to get the benefit of a loan once a year has passed since the end of the year in which he made the first deposit into his account, but not before five years have passed from the end of that year. For this purpose, a maximum of 25% of the remaining amount on his credit may be utilised. If an account holder has not paid back an earlier loan in full, including interest, they will not be eligible for another loan. A single loan may be taken out by an account holder each year. The interest rate on the principal amount is 1% annually.
Discontinuation of account: The account would be considered cancelled if the account holder deposits Rs. 500 in the first year and does not pay the minimum amount stipulated by the scheme in any subsequent year. The minimal amount required for each year of default plus a fee of Rs. 50 can be used to revive such an account. Following maturity, such account holders will not be permitted to open a new account prior to the halted account's closure.
Downsides of PPF
Because PPF has a 15-year maturity period, it might not be the best option for short-term objectives. Partial withdrawals are permitted following a predetermined time frame, but PPF limits early access to the entire corpus.
NPS vs PPF: A Comparative Analysis
It's critical to examine investment, returns, safety, taxation, and liquidity to determine which investment plan is best for you. To determine which is superior, NPS or PPF, let's compare these factors in the following table.
Key Features | NPS | PPF |
Investment Eligibility | Indian citizens between 18 years and 70 years of age | Any Indian resident, including in the name of minor children to avail of tax benefits |
NRI eligibility | Yes | No |
Interest Rates | 9-12% | 7-8% |
Maturity Period | Not fixed; can contribute till the age of 60 years with an option to extend the investment up to 70 years | 15 years; can also extend this term by a block of 5 years with or without further contribution |
Investment Limit | Minimum contribution of Rs.6,000 No limit on contribution as long as it does not exceed 10% of one’s salary/20% of your gross total income for the self-employed | Minimum Rs.500 annually Maximum amount capped at Rs.1,50,000 A maximum of 12 contributions per year |
Tax Benefits | Available on Rs.1.5 lakh under Section 80CCD(1) An additional Rs.50,000 under Section 80CCD(2) Total of up to Rs.2 lakh | All deposits deductible under Section 80C, limited up to Rs.1,50,000 Accumulated amount and interest are tax exempt at the time of withdrawal |
Permissibility of Premature Withdrawal/Partial Withdrawal | After 10 years, account holders can opt for early, partial withdrawal under specific circumstances. To exit before retirement, they must use at least 80% of the accumulated corpus to purchase a life insurance annuity | Partial withdrawal allowed after the 5th year onwards with some limitation Loans against PPF available from the expiry of first year from the year of deposit |
Choice to Invest | Yes, one can choose between: Equity funds Government securities fund and fixed income instruments Other government securities | No |
Return Potential | High because interest rate linked to the market | Interest rate decided by the government |
Annuity Buying Requirement | At maturity, one must buy an annuity worth a minimum 40% of the corpus, unless maturity amount is below 2 lakh | No |
NPS vs PPF: The Final Verdict
In conclusion, the choice between NPS and PPF depends on personal preferences and circumstances. However, you must consider the following factors to choose wisely:
Returns: PPF offers modest but steady returns of about 7-8%, whereas NPS can offer up to 10% under certain circumstances.
Risk and Safety: Although NPS is somewhat risky due to its market linkage, there is virtually no possibility of malpractice because it is closely regulated by the PFRDA. PPF offers nearly risk-free returns because it has the support of the government.
Liquidity: Because NPS offers several options for partial withdrawal, it has somewhat more liquidity. On the other hand, PPF permits partial withdrawals following a specific lock-in period and an amount cap.
Taxes: Annuities must be purchased after paying taxes, but the NPS amount that is withdrawn at maturity is tax-free. PPF falls into the exempt-exempt-exempt, or EEE, group.
NPS is an ideal retirement savings plan. However, if your goal is to save money for other things, like your daughter's marriage or your children's education, this might not be the greatest program to invest in. A PPF is rated as the superior investment scheme over an NPS for each of these requirements.
FAQ
Q1. Can I have NPS and PPF both?
It is possible to invest in both PPF and NPS. However, you are eligible to deduct up to Rs 1.5 lakh in taxes annually from your entire investment in the two programs combined. Furthermore, an additional deduction of up to Rs 50,000 is allowable for the yearly contribution made to NPS.
Q2. Which one is apt for retirement planning, NPS or PPF?
When it comes to the level of risk involved, NPS and PPF present you with two distinct kinds of investing options. NPS may provide greater profits due to its market linkage, but it also comes at a higher risk. Conversely, PPF is a conventional plan with assured profits. PPF is a safer investing option if you are hoping to fund family aspirations like your child's education, marriage, or home purchase. However, NPS can be lucrative if you are ready and able to take chances and are excited about increasing your wealth.
Q3. How does PPF differ from NPS?
By utilising the power of compounding, PPF provides you with guaranteed returns at comparatively lower interest rates. NPS has the potential to yield higher returns (10–14%), but there is market risk. PPF is also completely tax-free because the annual maximum amount that can be deposited is Rs 1.5 lakh, which is equivalent to the highest tax deduction allowed by section 80C of the Income Tax Act of 1961. However, NPS is only partially exempt from taxes because there is no maximum investment amount.
Q4. Which one is better, PPF or NPS?
NPS can yield profits of 10–14%, but there are market risks involved. However, the government regulates the plan, so the likelihood of malpractices is minimal. PPF, on the other hand, is not dependent on the market and is backed by the government, making it an entirely safe investment with guaranteed returns. Thus, it's critical to determine which best meets your needs before making the appropriate purchase.
Q5. What is the limit for the number of accounts one can open in PPF?
A person covered by the plan may open one account on behalf of each juvenile or mentally incapacitated person for whom he is the guardian. It is not permitted to open joint accounts under this scheme.
Q6. Is NPS tax-free on maturity?
Members of these plans may withdraw 40% of their investments as a lump amount at maturity, free from taxes. The maximum lump sum withdrawal amount is 60%; any amount over 40% will be subject to taxes.
Q7. Which investment is better than NPS?
There are a number of investing options available, and the ideal one for you will depend on your unique situation. Here are a few options to think about: Gold, real estate, stock market, mutual funds, fixed deposits (FDs), SIPs (Systematic Investment Plans), fixed income investments, PPFs (Public Provident Funds), Senior Citizens Savings Schemes (SCSS), and Real Estate Investment Trusts (REITs)
Q8. Is NPS a worthwhile investment?
NPS is a desirable option for long-term retirement savings since it provides professional fund management and tax benefits. Its low costs and regulatory protection increase its allure. NPS is subject to market fluctuations, which adds a degree of uncertainty. Your risk tolerance, investment horizon, and the significance of tax benefits in your financial planning will all determine whether or not investing in NPS is worthwhile. It might not be the greatest option for all financial objectives, but it can be a useful complement to retirement planning. Investment diversification is frequently advised.
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